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U.S. SEC charges 23 firms in short-sale crackdown; 22 settle

The U.S. Securities and Exchange Commission logo adorns an office door at the SEC headquarters in Washington, June 24, 2011. REUTERS/Jonathan Ernst

By Sarah N. Lynch

WASHINGTON (Reuters) - Twenty-two investment firms will collectively pay more than $14.4 million in sanctions to settle civil charges in connection with a broad crackdown by federal regulators into illegal short-selling practices, the U.S. Securities and Exchange Commission said on Tuesday.

The SEC said it had charged 23 firms for violating a rule that prohibits firms from shorting a stock within a five-day window of a public offering, and then buying the same security through the offering.

Only one of the 23 firms, G-2 Trading LLC, is fighting the charges through litigation.

The SEC also simultaneously issued a risk alert that seeks to highlight the enforcement cases as an example to warn the market against violating the short-selling restrictions, known as Rule 105 of Regulation M.

The prohibition against short-selling ahead of an offering and then buying the same stock in the offering is aimed at reducing the chances of market manipulation. The rule applies regardless of a trader's intent.

The SEC said the firms charged all bought shares from an underwriter, broker or dealer participating in a follow-on offering after they had shorted the stock during the restricted period.

Among the 22 firms that are settling the SEC's charges are D.E. Shaw & Co, Hudson Bay Capital Management, and the Ontario Teachers' Pension Fund Plan.